ECB, BOE Elect to Keep Interest Rates Steady

The ECB
and the BoE
have both elected to keep interest rates steady, despite growing concerns about
the U.S.
mortgage crisis, the credit crisis and slowing economic growth. The basic
message from both banks is that fighting inflation is their key focus and their
overall approach will be to take a cautious, measured approach to evaluating
economic conditions and setting fiscal policy. I agree with the current
approach of both the ECB and the BoE, as while reactionary changes may calm the
markets and provide short-term benefits, they’re not necessarily synergistic
with a central bank’s key mission of enabling long-term economic growth and
stability,

Some politicians in the Eurozone have expressed concern about the
rising value of the Euro impacting companies in their respective countries,
indicating a degree of political pressure to cut rates. Whilst the ECB has
indicated that it’s at least open to rate cuts in the future, it doesn’t appear
the president of the ECB is one who will be easily swayed by political
pressure.

From Bloomberg:

European
Central Bank President Jean- Claude Trichet signaled the bank is in no rush to
raise interest rates as higher credit costs threaten to slow economic growth.

"It remains
necessary to gather additional information and examine new data before drawing
further conclusions for monetary policy,'' Trichet said at a press conference
in Vienna today, two weeks after the U.S. Federal Reserve cut interest rates.
Trichet dropped a phrase used in previous months that the ECB's monetary policy
``is still on the accommodative side,'' suggesting the bank no longer considers
interest rates are boosting economic growth.

Europe's economy is now showing signs of slowing as rising
credit costs start hurt consumers and companies. Euro-region service industries
from insurers to airlines grew at the weakest pace in two years in September.
U.K. house prices, which have tripled in the last decade and powered economic
growth over the period, fell for the first time in nine months in September,
HBOS Plc said today…

[…]

Politicians
including Italian Prime Minister Romano Prodi and his Luxembourg
counterpart Jean-Claude Juncker have expressed concern that the stronger euro
will curb economic expansion by making exports more expensive. Trichet
countered by urging them to show ``verbal discipline'' when discussing the euro
and refused to signal increased concern about its climb.

Show “verbal discipline” eh? Ouch.

In the U.K.,
there are concerns about an unfolding banking crisis, as well as a potential
mortgage/real estate crisis, as housing prices did in fact decline over the
past month. In fact, the British retailers association as well as Ernst and
Young have both expressed support for the BoE to cut rates, with the latter
claiming it would be the “smartest move
for the economy”.

From the Telegraph:

The Bank
of England
has resisted increasing pressure to cut interest rates as policy makers take
more time to assess the impact of the credit crunch on the broader economy

The decision by
the Bank's Monetary Policy Committee to leave the cost of borrowing at 5.75pc
was predicted by all but one of the 60 economists surveyed by financial news
agency Bloomberg.

Governor Mervyn
King has come under heavy fire for his handling of last month's Northern Rock
crisis, which has dented consumer confidence and called into doubt the Bank's
earlier projection that rates would need to rise to 6pc.

While the members
of the MPC are taking more time to examine the impact of the financial turmoil
on the rest of the economy, housing data today from the Halifax suggests the market is slowing.
Prices dropped 0.6pc last month, the first decline this year as both buyers and
sellers stood back from the market.

The Bank had
indicated in its quarterly Inflation Report in August that rates might have to
rise keep inflation on track, but since then the CPI has dropped and the
economy has been beset by profound threats.

Today's decision
to leave rate on hold will come as a disappointment to the British Retail
Consortium. Kevin Hawkins, its director general, yesterday called for the bank
to take immediate action on rates.

The plea from the
country's retailers comes after a warning from the Ernst & Young Item Club
over the weekend that a cut would be the smartest move for the economy and the
struggling financial services sector.

It will be interesting to see how this plays out as both the ECB and
the BOE are under pressure to cut interest rates and economic conditions may
force them to in the near future. If the BoE cuts rates I suspect it will be
due to a combination mortgage/banking crisis in Britain; whilst the declining
dollar may force the ECB to cut rates, due to the pain a rising Euro may
inflict on Eurozone companies.